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Companies with a market capitalisation of more than Rs 20,000 crore are classified under large cap.
This article covers the following:
Large cap mutual funds predominantly invest in companies having a large market capitalisation. Large cap funds are known to offer consistent returns. The companies in which large-cap funds invest are generally leaders in their field of business and hence, tend to remain more stable when compared to small or mid-cap companies at times when the markets go volatile. The large cap companies typically have a good track record in the market backed by healthy corporate governance practices.
The following table shows the top large cap funds as per the past 3-year and 5-year returns:
Explore other large-cap funds here.
Large cap mutual funds are a class of equity funds that invest mostly in the equity and equity-linked instruments of companies ranked under 100 in market capitalisation. Large cap companies are known for their stability and have a track record of providing consistent returns. However, these companies may be outperformed by small and mid-cap companies during the bullish market trends.
Conservative equity investors may consider investing in these funds as the underlying companies are not affected much by the market movements. Therefore, these funds are less volatile than small and mid cap funds. The asset allocation of large companies is mostly made towards the securities issued by blue-chip companies.
As mentioned above, the large cap funds are suitable for conservative equity investors. Since the asset allocation of these funds is predominantly made towards the securities issued by relatively stable companies, the performance of these funds is stable. This makes large cap funds less vulnerable to the volatility seen in the equity markets.Investing in large cap funds is suitable for those looking to diversify their portfolio with the stocks of leading companies across market sectors. If one sector fails to meet the expectations, the other sectors may help in reducing the adverse effects. On the flip side, the returns offered by these companies can be curtailed as the underlying companies are stable and generally provide lower returns than small and mid cap companies.
You may consider investing in these funds if you are not willing to take a high risk and are happy with average returns. First-time equity investors may get started with their market-linked investments by investing in these funds. This will give them a glimpse of what mutual funds are capable of.
Since large-cap funds are a class of equity funds, they are necessarily taxed like any other equity fund. The dividends were previously made tax-free in the hands of investors until Budget 2020 as the fund houses paid dividend distribution tax (DDT) before paying dividends to investors. The Budget 2020 amended this law by bringing back the classical way of taxing dividends in the hands of investors. The dividends offered by mutual funds are added to your overall income and taxed as per the income tax slab you fall under.
The taxation of capital gains offered by equity funds depends on the holding period. You make short-term capital gains on selling your fund units within a holding period of one year. These gains are taxed at a flat rate of 15%, irrespective of your income tax slab. You make long-term capital gains on selling your equity fund units after a holding period of one year. These gains of up to Rs 1 lakh a year are made tax-exempt. Any gains exceeding this limit are taxed at a rate of 10%, and there is no benefit of indexation provided.
Since large-cap funds are equity funds, they come with the same risks that any other equity fund carries. The following are the risks associated with a large-cap fund:
Market risk is the possibility of the markets underperforming. Several economic and geopolitical factors affect market movements.
Concentration risk is the possibility of suffering massive losses due to investing predominantly in stocks of a particular sector company. There is no doubt that you make significant gains when you concentrate your investments in a given sector, and it performs well. On the flip side, your losses would be magnified if that sector fails. The old saying of ‘don’t put all your eggs in one basket’ holds good for investments as well.
Interest Rate Risk
The interest rates move depending on the availability of credit with issuers and the demand for the same in the market. An increase in the interest rate may result in the security’s price moving in the adverse direction.
Liquidity risk is the possibility of the fund manager unable to sell the securities at a profit due to the lack of buyers.
Credit risk is the possibility of the issuer of the security not standing up to their obligation to pay interest and return the principal invested at the time of maturity.
Large cap funds are also subject to market risk. Investors must consider factors that may impact the performance of their investment and ultimately, the returns. Investors should keep in mind their age, risk profile, goals, and investment horizon while making any investment decisions.
Following are some of the factors that investors must analyse while investing in large-cap mutual funds.
Know your investment objective
Check if the objectives of the fund are in line with your goals. Understand the style of fund management to know about the performance of the funds.
Past performance of the large cap fund
Analysing the past performance is crucial while deciding to invest in large cap funds. Pick those funds that have been consistent in their numbers in all market conditions and cycles.
Experience of the fund manager
Fund managers, particularly in the case of large cap mutual funds, play a definitive role in the generation of returns. Fund managers with experience and expertise will be able to move the capital in the right direction when the market looks promising.
Expense ratio impacts investors directly and includes costs such as the brokerage fee, the fee charged by the mutual fund house, and so on. Some fund houses may charge a high fee but also offer higher returns. Keep in mind the fee, other charges, NAV, and returns before shortlisting funds.
Know about the exit load
This is a cost that investors directly incur. Despite exit load coming into the picture only at the time of redemption, you should still consider it. Exit load takes away a fraction of the NAV. Hence, the lower exit load translates into higher returns.
As an investor, you must look at specific financial ratios to evaluate mutual funds. The following are some of the important ratios to be considered:
Sharpe ratio measures the risk-adjusted return of a mutual fund scheme. If a fund has a higher Sharpe ratio, then it is considered relatively better than its peers.
Sharpe ratio = (Mean portfolio return − Risk-free rate)/Standard deviation of portfolio return
The dispersion of a set of data from its mean or average is measured through standard deviation. In finance, standard deviation indicates the volatility of an investment from its annual rate of return. A stock having a higher standard deviation will have a larger price range, which again is indicative of higher volatility in comparison to stocks with a low standard deviation.
Beta indicates a fund’s sensitivity to the correlated market movements. If a fund registers a Beta of 1.0, then it means that its volatility is precisely equal to the benchmark. If a fund has a Beta of 0.90 or less, then it means that it is 10% less volatile and if the Beta is 1.40, then it means that the fund is 40% more responsive than the benchmark.
R-Squared reflects the percentage of fund returns that fall in line with the benchmark returns. The value of R-Squared rests between 0 and 1 and is denoted as percentages from 0 to 100%. A fund with an R-Squared of 100% will have its securities’ movements explained by movements in the index. A higher value of R-squared means a more useful beta figure.
Alpha is a measure of the fund manager’s ability to make profits when the benchmark registers a profit. Alpha can be equal to 1.0 or even less or more than 1.0. The higher the Alpha, more is the ability of the manager to generate profits from the benchmark movements.
Advantage of large cap mutual funds
One of the most significant advantages of investing in large-cap funds is the stability they offer. These companies have a solid track record, providing regular payment of dividends as well. This compensates for the fact that large-cap funds do not have the potential to offer very high returns.
Because of their presence in the market for many years, investors can access their profitability and financial details for a course of time to assess their performance before making any decisions. This financial research data, when viewed alongside the history of the company and its present business activities, can help in the accurate determination of the valuation.
Investing in mutual funds can be risky if you don’t understand market movements, and it is recommended to consult an expert. You may speak to our investment experts at ClearTax for guidance.
Disadvantages of large cap mutual funds
These funds have been characterised as an ideal investment option for new investors or those that do not wish to take risks. One disadvantage of this fund is that the growth potential of underlying stocks might be limited.
The returns generated also happen to be lower than those that one gets from the small and mid-cap funds. In addition to this, it is the fund manager who takes the decisions pertaining to the stocks in your portfolio, which leaves you with little or no control on the portfolio.